Outsourcing service providers specializing in global trade management may also issue letters of credit for their buyers. The process is the same but has one advantage: the supplier may offer terms that give buyers time to actually collect money from customers before they have to repay their letters of credit.
“Most of our clients are out the money for their goods months before they collect a penny,” explains Jeff Guettler, Director of Business Development for Sojitz Corporation, an outsourcer that provides global trade management services including letters of credit to its customers.
For example, if an American wholesaler buys goods from China, the exporter wants to be paid when he ships the goods. The shipment may spend weeks on the water coming to America, then another 30 days going through US Customs and riding in a truck or train to the wholesaler’s warehouse. Then the retailer starts his term payments with the wholesaler, which typically adds another 30-60 days. All in all, it can easily take four to six months before the wholesaler sees any return on his original cash outlay.
“We can shorten the purchase-to-pay cycle for our customers, so they have the opportunity to get paid before they have to pay us,” Guettler explains.
In addition, Sojitz’s buyers do not have to supply any collateral for their letters of credit, a standard practice at commercial banks.
But banks are still involved. Sojitz issues its letters of credit by drawing down its own line of credit at its Japanese banks.